REITS and Rising Interest Rates

Paul Ohanian

Founder & CEO, Scottsdale Wealth Planning, Inc.

As a seasoned investment professional, I have often looked to real estate to provide asset diversification, lessen general stock market exposure and, where appropriate, generate income in a portfolio. In a past Journal issue, I discussed the characteristics of Real Estate Investment Trusts or “REITs,” professionally managed pools of real estate investments often traded on exchanges (NASDAQ or NYSE). I now would like to outline the impact of rising interest rates within the publicly-traded REIT space.

As Q3 2015 comes to an end, it brings another opportunity for the Federal Reserve to raise interest rates for the first time since June 2006. Like other real estate investors, REIT holders are concerned that an interest rate hike will negatively impact property values – and the market reaction supports that fear. As the Fed gets closer to declaring an end to Quantitative Easing (a process aiming to increase spending in the economy), domestic REITs have been selling off, leaving many trading at a discount to book value. The Dow Jones U.S. Real Estate Index has been down significantly since its high in January; to date 2015 has not been a stellar year for REITs.

However, historical data tells us that over time REITs perform well during times of rising yields and can recover. Rising interest rates are often tied to improved economic conditions; typically, this leads to a stronger demand for real estate which ultimately produces higher rents and/or interest on mortgage loans collected by REITs.

One study highlights how well U.S. REITs rebound under similar circumstances averaging nearly 19% in returns in the 12 months after falling below their net asset value. In spite of recent stock market volatility, positive conditions do exist for 2015, including strong job growth and an expanding economy – which impacts REITs overall performance.

While past performance is not always an indicator of future returns, reviewing the overall REITs investment from a long-term and short-term perspective is wise. The rise in interest rates presents some interesting opportunities to buy REITs at a discount today with an eye for positive returns as rates continue to rise in the future.
Information contained in this article is for informational purposes only and should not be considered investment advice. Advice may only be provided after entering into an advisory agreement with Scottsdale Wealth Planning. Information is at a period in time and subject to change. Scottsdale Wealth Planning’s current Disclosure Brochure is set forth on Form ADV Part 2 and is available for your review upon request.

Paul Ohanian, is founder and CEO of Scottsdale Wealth Planning, Inc., an Old Town-based registered investment advisor, and Certified Financial Planner® with more than 25 years of experience providing financial services to the Valley. Visit him at www.scottsdalewealthplanning.com.